Proposed Excepted Benefit Rules Update Limited Wraparound Coverage Criteria

Practical Law Legal Update 4-593-5205 (Approx. 6 pages)

Proposed Excepted Benefit Rules Update Limited Wraparound Coverage Criteria

by Practical Law Employee Benefits & Executive Compensation

Excepted Benefits

Certain group health plan requirements under ERISA, the Internal Revenue Code (IRC) and the Public Health Service Act (PHSA), and including changes under the ACA, do not apply to group health plans in providing "excepted benefits." The proposed regulations would amend a subpart of one of the four general excepted benefits categories (known as limited excepted benefits). This subpart was previously addressed in the December 2013 proposed regulations, which:

Would have allowed plan sponsors to offer wraparound coverage under a group health plan to individuals who did not otherwise enroll in the employer's plan because the premiums were affordable to them (see Legal Update, Proposed Rules Include Excepted Benefits Wraparound Coverage Option and EAP Guidance).
Also included provisions affecting limited-scope vision or dental benefits and employee assistance programs (EAPs).

If the limited employer-sponsored coverage qualified as an excepted benefit, it did not prevent employees from obtaining a premium tax credit under the ACA health insurance exchanges.

In September 2014, the Departments finalized a portion of the December 2013 proposed regulations affecting limited-scope vision and dental benefits and EAPs (see Legal Update, New Guidelines for Employee Assistance Programs). At that time, the Departments indicated that they had received a large number of comments on the portion of the December 2013 proposed regulations addressing limited wraparound coverage.

Limited Wraparound Coverage

As with the December 2013 proposed regulations, the new proposed regulations would impose five requirements for limited wraparound coverage to constitute an excepted benefit, though certain of the criteria have changed. Under the revised criteria, employer-sponsored limited wraparound coverage would be an excepted benefit if it:

Covers additional benefits. The coverage must provide "meaningful benefits" (for example, benefits that are not essential health benefits) and cannot act simply as a cost-sharing mechanism. The coverage must do more than cover cost sharing because reduced cost sharing can be obtained through individual health insurance with a higher actuarial value. In addition, the limited wraparound coverage:
- must be specifically designed to wrap around eligible individual health insurance; and
- cannot provide benefits solely under a coordination of benefits provision, or be solely an account-based reimbursement arrangement.
Is limited in amount. The annual cost of coverage per employee and covered dependents under the coverage cannot exceed the maximum annual contribution for health flexible spending accounts (health FSAs), which is $2,500 in 2014, indexed for inflation (26 U.S.C. § 125(i)(2)) (see Practice Note, Cafeteria Plans). The cost of coverage would include both employer and employee contributions towards coverage and would be determined the same way as premiums for COBRA (see Practice Note, COBRA Overview). In the preamble to the proposed regulations, the Departments note that the $2,500 limitation is intended to be simpler to administer than the 15% cap required under the December 2013 proposed regulations.
Meets three nondiscrimination requirements. Specifically, the limited wraparound coverage cannot:
- impose preexisting condition exclusions (consistent with the ACA, see Practice Note, Preexisting Condition Exclusions and Rescissions under the ACA);
- discriminate against individuals in eligibility, benefits or premiums based on a health factor; or
- discriminate in favor of highly compensated individuals (consistent with the ACA, see Practice Note, Nondiscrimination Requirements for Insured Group Health Plans under the ACA).
The third nondiscrimination component expressly applies to both the limited wraparound coverage and any other group health plan coverage offered by the plan sponsor.
Meets certain plan eligibility requirements. The coverage cannot be made available to individuals already enrolled in excepted benefit coverage that is a health FSA. The plan must also comply with one of two alternative sets of requirements relating to eligibility and benefits. One set of requirements applies to wraparound coverage for individuals who are not full-time employees, and the other set applies to wraparound coverage for certain multi-state plans (MSPs) (see Plan Eligibility Requirements for Limited Wraparound Coverage ).
Is properly reported to HHS and the Office of Personnel Management (OPM). Specifically:
- a self-insured group health plan, or a health insurer offering MSP wraparound coverage, must provide information to OPM so that OPM can determine whether the plan or insurer is complying with the proposed regulations; and
- the plan sponsor of a group health plan offering limited wraparound coverage must also provide certain information to HHS.

Plan Eligibility Requirements for Limited Wraparound Coverage

As noted above, limited wraparound coverage is an excepted benefit if it satisfies the plan eligibility requirements for coverage that is:

Offered in conjunction with eligible individual health insurance (EIHI) for non-full-time employees. Under the proposed regulations, EIHI generally refers to individual health coverage meeting certain requirements (for example, it is not grandfathered under the ACA and does not consist solely of excepted benefits) (see Practice Note, Grandfathered Health Plans under the ACA).
Wraps around certain MSP coverage.

Limited wraparound coverage offered in conjunction with EIHI for individuals who are not full-time employees must meet three requirements:

For each year that wraparound coverage is offered, the employer sponsoring the plan offering wraparound coverage must offer to its full-time employees coverage that:
- is substantially similar to coverage the employer would need to offer to its full-time employees to avoid an ACA employer mandate penalty under IRC Section 4980H(a) (see Practice Note, Employer Mandate under the ACA: Overview);
- provides minimum value (as defined in IRC Section 36B(c)(2)(C)(ii)); and
- is reasonably expected to be affordable (according to the safe harbor rules for determining affordability under 26 C.F.R. Section 54.4980H-5(e)(2)).
The eligibility for the limited wraparound coverage must be limited to employees who are not full-time employees or who are retirees (and these individuals' respective dependents. The Departments propose that full-time employees for purposes of this requirement are employees who are reasonably expected to work at least an average of 30 hours per week; full-time employees would not be defined strictly in accordance with IRC Section 4980H. The Departments intend that employers rely on either the 4980H definition or any reasonable interpretation of who is reasonably expected to work an average of 30 hours per week.
Group health plan coverage that is not limited to excepted benefits must be offered to individuals eligible for the wraparound coverage. Only individuals who are eligible for other group health plan coverage may be eligible for the wraparound coverage.

Limited wraparound coverage offered in conjunction with MSPs must meet four requirements:

It must be specifically designed and approved by OPM to provide benefits in conjunction with coverage under an MSP authorized under the ACA (see Practice Note, Multi-state Plans under the ACA).
The employer must have offered coverage in the plan year that begins in 2014 that is substantially similar to coverage that the employer would need to have offered to its full-time employees to avoid an employer mandate penalty under Section 4980H(a), if this provision had been applicable.
In the plan year that begins in 2014, the employer must have offered coverage to a substantial portion of full-time employees that provided minimum value and was affordable (according to the safe harbor rules for determining affordability under 26 C.F.R. Section 54.4980H-5(e)(2)).
The employer's annual aggregate contributions for both primary and limited wraparound coverage must be substantially the same as the employer's aggregate contributions for coverage offered to full-time employees in 2014. This equivalence must continue for the duration of the pilot program allowing limited wraparound coverage as an excepted benefit (see Pilot Program).

Either or both of the alternative sets of requirements (for individuals not working full-time and for MSPs) could be included in the final regulations.

Pilot Program

The new proposed regulations would allow limited wraparound coverage under a pilot program with a specified sunset date. Limited wraparound coverage could be offered as excepted benefits to coverage that is first offered no later than December 31, 2017 and that ends on the later of the date:

That is three years after the date that wraparound coverage is first offered.
On which the last collective bargaining agreement relating to the plan terminates after the date wraparound coverage is first offered.

The Departments invite comments on this time frame, including whether the Departments should have the option to establish an earlier termination date.

Comment Period

The Departments requested comments on the new proposed regulations, including:

The special circumstances of small businesses that are not subject to the ACA's employer mandate.
Whether modifications to health FSAs or other existing policies tailored to the needs of small businesses may also be beneficial to employers and employees.

Practical Impact

Like the December 2013 proposed regulations, the December 2014 proposed regulations would allow plan sponsors to offer wraparound coverage under a group health plan to individuals who could not afford the employer's minimum value coverage. Employers that were considering offering limited wraparound coverage under the December 2013 proposed regulations will want to become familiar with these new proposed regulations -- especially those requirements that are now different (for example, elimination of the 15% cost limit, which has been replaced with a "bright line" $2,500 limit).

Proposed Excepted Benefit Rules Update Limited Wraparound Coverage Criteria | Practical Law